A Free-Market Energy Blog

Governors Demand Wind PTC to Cover State Costs

“The Governors know that the federal PTC disproportionately benefits States with renewable mandates by distributing the high cost of their policies to taxpayers at large. They also understand that eliminating the PTC will impose the full burden of costly renewable mandates squarely on the States who enacted them. If California, New York, and Minnesota mandate large wind development, it’s appropriate they bear the full cost of their energy choices.”

The United States is in the midst of a fiscal crisis. If Congress and the White House are unable to reach agreement on spending by January 1, crushing tax increases and draconian budget cuts will go into effect sending the country’s already weakened economy into another destructive recession.

Against this backdrop, the 23-member Governors’ Wind Energy Coalition put aside their own states’ $2+ trillion deficits[1] to deliver a message to Congress — extend the wind production tax credit (PTC).

The staged media event on Capitol Hill was a modern-day equivalent of Nero fiddling while Rome burned.

The Letter

In their letter, the governors acknowledge the wind industry is not yet competitive with other fuel sources but insist it will be “in the not-so-distant future.”

The governors are convinced the wind subsidy should be a top priority for the country ahead of our military and other bread-and-butter issues but are unaware, or don’t care, that American taxpayers are shouldering a large part of the cost.

Do they realize that by 2015, American taxpayers will have provided a cumulative $40 billion to the industrial wind energy industry in production tax credits and cash grants alone, the bulk of which will be distributed after 2010? Or that the open-ended subsidy of 2.2¢/kWh in after-tax income represents a pre-tax value (3.4¢/kWh) that’s equal to, or more than the wholesale price of power in many regions of the country?

Why the SOS?

Why would the Governors demand billions more for an industry that, after over 20 years, has failed to establish itself as a self-sustaining contributor to meeting our energy needs?

It’s no accident that all of the Governors who signed the letter hail from states with mandatory renewable portfolio standards (RPS) or from states adjacent to those with RPS policies.

State legislators who voted in favor of renewable mandates, did so after being convinced that adding alternative resources to the energy mix, particularly those with no fuel cost, would reduce fossil use, attract jobs and ultimately stabilize and lower energy prices. (Wind energy was seen by most as the dominant resource for meeting compliance.)

But they were wrong.

Researchers at the Lawrence Berkeley National Labs (LBNL) found that ‘Policy Impact’ studies relied on by the states tended to underestimate the effect of adding high-cost renewables on retail rates and all of them failed to anticipate the persistent low natural gas prices we enjoy today.

Seventy-percent of the RPS cost studies that were examined forecasted minimal retail electricity rate increases – no more than 1% – while a number predicted electricity consumers would experience a cost savings.

In fact, the artificial no-compete power markets created by RPS policies drove up electricity prices and forced consumers to pay for energy they didn’t need. In 2011 residential rates in states with mandates were 27% higher than those without mandates while industrial electricity prices were 23% higher.

The Governors know that the federal PTC disproportionately benefits States with renewable mandates by distributing the high cost of their policies to taxpayers at large. They also understand that eliminating the PTC will impose the full burden of costly renewable mandates squarely on the States who enacted them. If California, New York, and Minnesota mandate large wind development, it’s appropriate they bear the full cost of their energy choices.

Iowa is an exception. Its capacity-based RPS was satisfied years ago with the installation of just 105 megawatts of wind capacity, leaving the state’s two investor-owned utilities, including Warren Buffett’s MidAmerican Energy, at liberty to sell most of their wind power to neighboring states — which they do at prices significantly above market.

According to Mark Glaess, executive director of the Minnesota Rural Electric Association, which represents about 50 small utilities serving about 650,000 rural residents, its members lost more than $70 million in 2011 because of the high cost of wind power. “Right now we’re paying for wind power we don’t need, we can’t use and can’t sell,” he said.

Expiration Is a Compromise

The production tax credit, which turns twenty years old this year, serves little purpose today other than to line the pockets of project owners and tax-advantaged investors and artificially mask the true price of wind power.

If the PTC were to expire, REC prices in states with RPS policies would likely go up for a while until the industry can implement necessary cost-cutting measures. States will respond by reexamining ways to rein-in RPS-related energy costs. We will also likely see the industry shift their business plans away from those based on tax avoidance to plans based on energy production – as they should be. American taxpayers and ratepayers would be best served by letting the PTC expire.

The Governors’ self-serving pleas aside, there is no justification for wind projects eligible under any State RPS programs to receive the benefit of BOTH the State policies and the PTC wealth transfer from taxpayers. Congress has a responsibility to say NO.

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[1] The 23-member Governors oversee states with a combined aggregate debt of more than $2 trillion for fiscal year 2011 including California and New York representing total debt of nearly $1 trillion.

What Irony! Many states have instituted “feel good” policies of requiring renewable sources such as wind, for producing electricity. Now, governors of some of these states are realizing that these policies are increasing electricity costs in their states. To off-set these costs, they are demanding greater Federal subsidies for wind power. This action is a clear example that wind power increases the costs of electricity to consumers – so much for free energy. It is time that the states bear the costs of their financially irresponsible “feel-good” policies.